CapitaLand Commercial Trust - Even Better Days Ahead

Boost from recent acquisitions with better times ahead on the back of rising spot office rents.

Still awaiting deployment of proceeds from sale of Twenty Anson into Europe.

Maintain BUY, Target Price of S$2.12.

What’s New

3Q18 DPU up 8.9% y-o-y

CapitaLand Commercial Trust (CCT) reported a robust 3Q18 DPU of 2.20 Scts which was up 8.9% y-o-y while 9M18 DPU came in at 6.48 Scts which fell 1.5% y-o-y largely due to a soft 1Q18 (-9% y-o-y) which was impacted by the additional shares on issue arising from the rights issue conducted last year.

Nevertheless, 3Q18 results were largely in line with expectations with 9M18 DPU representing c.73% of our FY18F DPU of 8.69 Scts.

The robust 3Q18 performance was mainly attributed to the earnings contribution from the acquisition of Asia Square Tower 2 (AST2 – completion in 4Q18) and Gallileo (completion in 2Q18) partially tempered by the loss of income arising from the earlier sale of Wilkie Edge and Twenty Anson. The acquisitions resulted in overall 3Q18 revenue and NPI rising 35.6% and 37.3% y-o-y respectively.

On a same-store basis excluding the disposal and purchases, 3Q18 revenue and NPI would have been up 0.9% and flat y-o-y respectively. The steady performance is strong considering the impact of negative rental reversion over the past 18 months. These negative rental reversions resulted in 3Q18 NPI for CapitaLand Commercial Trust’s key assets, Capital Tower (c.17% of 3Q18 NPI) and 6 Battery Road (c.17% of 3Q18 NPI) falling 1.4% and 0.7% y-o-y respectively. This was partially offset by a 2.3% y- o-y increase NPI for CapitaGreen which benefitted from slightly higher occupancies (99.4% versus 99.0% in 3Q17).

NPI contribution from AST2 was steady at S$19.8m. However, this should increase going forward as committed occupancy had increased to 98.8% from 98.3% in 2Q18 as CapitaLand Commercial Trust recently announced the signing of The Work Project, a co-working operator which CapitaLand Commercial Trust’s sponsor, CapitaLand has a 50% interest as tenant. Meanwhile, NPI for Gallileo of S$5.6m is tracking in line with CapitaLand Commercial Trust’s initial 4% target NPI yield.

Contributions from CapitaLand Commercial Trust’s Singapore associates were generally weaker with NPI for Raffles City and One George Street (OGS) on a 100% basis falling 3.4% and 1.0% y-o-y respectively. Raffles City was impacted by a dip in occupancy to 98.8% from 99.6% in 3Q17 and impact from the AEI works on the hotel component of the property. OGS also faced a drop in occupancy to 97.5% versus 98.0% in 3Q17.

Overall portfolio committed occupancy rose to 99.2% from 98.5% in 3Q17 and 97.8% in 2Q18, owing to the improvement seen at AST2. Occupancy for CapitaLand Commercial Trust’s other buildings excluding those mentioned earlier were generally stable q-o- q and y-o-y.

Rental reversions turning more positive

Over the quarter, based on the disclosed expiring rents and committed rents achieved over the quarter, it appears CapitaLand have started to turn more positive. While signing rents for AST2 and Capital Tower were below OGS and CapitaGreen Battery Road, on average there appears to be minimal difference committed and expiring rents. This is in a few quarters ago when all buildings were reporting negative rental reversions (see table overleaf).

Going forward with Grade A CBD at S$1045 psf/mth and expected to climb higher next year, we expect CapitaLand Commercial Trust to report positive rental reversions as expiring rents for FY19 and FY20 are at S$1070 psf/mth and S$955 psf/mth respectively.

Post the leases signed in 3Q18, no leases are up for renewal for the remainder of FY18. For FY1918% of leases are due 26% previously as CapitaLand Commercial HSBC’s lease at 21 Collyer HSBC relocates to Marina Bay Financial Centre Tower 22020.

Upon HSBC understand that CapitaLand Commercial Trust is reviewing options to re-lease the building or property. While the plot understand there is some inefficiency currently which a potential address.

Lower gearing and borrowing costs following divestment of Twenty Anson

After the repayment of debt following the sale of Twenty Anson, CapitaLand Commercial Trust’s gearing fell to 35.3% from 37.9% at end-2Q18.

The cost of debt also fell to 2.6% from 2.8% as CapitaLand Commercial Trust repaid some of its more expensive debt.

Extension of lease at Bugis Village for another year

CapitaLand Commercial Trust announced that despite the Singapore authorities exercising their right to take back the leasehold title at Bugis Village on 1 April by compensating CapitaLand Commercial Trust S$40.7m, CapitaLand Commercial Trust has entered into a new one-year lease for the property from April 2019 to March 2020. The expected additional net income from the property is c.S$1m.

This is a positive surprise as we had previously assumed zero income from Bugis Village from April 2019 onwards.

Still awaiting further deepening of European presence

Thus far, CapitaLand Commercial Trust has not deployed the S$516m received from the disposal of Twenty Anson but instead repaid some of its debts.

We suspect CapitaLand Commercial Trust will be looking to deepen its presence in Europe following its maiden acquisition in Frankfurt earlier this year.

Europe currently represents c.5% of CapitaLand Commercial Trust’s portfolio by asset value versus its long-term aim of having 10-20% of its assets outside Singapore.

Maintain BUY, Target Price of S$2.12

On the back of expectations of a multi-year recovery in office rents due to limited supply over the next few years, which should translate into higher rental income ahead, we reiterate our bullish view on CapitaLand Commercial Trust. There is also upside risk to our earnings should CapitaLand Commercial Trust deploy its strong balance sheet into Europe.

Thus, we maintain our BUY call and Target Price of S$2.12

Mervin SONG CFADBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/2018-10-29

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